Loss of company tax revenue to the IoM

A written reply by the Treasury Minister to a parliamentary question by Lawrie Hooper MHK in June 2017 revealed the total profits earned by all Manx companies wholly-owned by Manx residents in 2015-16 (the latest available). It is £542m. If these profits were taxed at 20%, that would be an extra £108m for the Manx Government. The number of such wholly-owned companies was 7,321 – about one-quarter of all companies registered here:

Of course, ordinary employees and pensioners pay their income tax, but the more wealthy can roll up all their income – fees, dividends, rents, interest – in their company, year after year, being taxed (as an individual) only on the dividend or drawings they may take out to live on. The company can be sold at any stage, preventing that income from ever being taxed. The capital gain on the company’s sale is not taxed either, there being no capital gains tax on the IoM.

This grossly unfair situation has come about because in 2012 the EU Code of Conduct Group looked into the taxation of companies here and ruled that all companies, whether owned by Manx residents or by others, must pay the same level of tax – there can be no discrimination. Prior to 2012 the Isle of Man had levied an ‘Attribution Regime for Individuals’ (ARI) on the profits of Manx companies, alongside a 0% rate for almost all* non-Manx companies – but the EU Code of Conduct Group ruled that ARI was a tax in all but name, and that it had to go. The IoM duly complied by deciding that all companies – including Manx-owned – would henceforth be taxed at 0%, giving rise to a domestic tax-free holiday through incorporation, for those who can afford it.

* A small number of companies – banks and large UK-owned retailers – are taxed at 10%.

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4 thoughts on “Loss of company tax revenue to the IoM”

I am really interested after your TV appearance to know a couple of things. I just cant get my head around a few things. Firstly yes it may seem unfair for us to tax differently than other parts of the world so are you suggesting a global tax regime? Or are you saying that the “fairness” of the IOM tax legislation compared to the UK is wrong? In which case that is only one tax jurisdiction so what about the others globally?

A global tax regime would be great – a level playing field, ideally within the UN framework, rather like the World Trade Organisation (WTO) but for tax. Sadly the US & UK are currently blocking the proposal. The IoM has made steady progress in transparency over the years and is far from being the worst offender; BVI, Caymans, Switzerland and even Jersey are more significant players than us.

‘Offshore’ covers a range of issues – but zero tax is a biggy. The 0% company tax rate here is harmful because it encourages profit shifting by multinationals (although IoM has recently signed up to combat this), and also from a Manx point of view because it allows well-off individuals to legally escape tax by routing their income through their company. It also means than local companies, not least very profitable financial services and e-gaming firms, don’t pay a penny towards local schools, hospitals, infrastructure – from which of course they benefit.

Being offshore also attracts businesses such as:
– ‘payroll solutions’ firms through which UK (and elsewhere) self-employed workers route their pay, simply to escape UK tax & NI.
– investment funds based here which have crashed, leaving angry depositors – Louis Group, Premier Group, Quadris, Scottish Power.
– anyone looking for lax regulation – for example ‘I Want Ticket Ltd’, a firm which specialised in buying online large blocks of tickets for popular events, then sold them at grossly inflated prices. This is illegal in UK but not here.

Your 2nd question is harder to answer. I’m not an economist but there are many sectors which the Govt is rightly trying to attract – clean tech, light industry eg optical instruments, space/satellites, biomed (but beware lax regulation, see above), niche tourism etc. There are plenty of honest ways of making a living. But I recognise that many jobs are located in the offshore sector (although much of the finance sector is not ‘offshore’) which sadly may be in jeopardy.

I have been trying for ages to figure out how this will work. I have not come up with a solution as there are so many variables and tax legislation is a nightmare in different places globally I don’t think it would ever work. But as you know globally there is the double taxation agreements which kind of does what you are looking at but in a different way and can be used to ‘level’ the playing fields of the nightmare of taxation.

I have answers for your listings about offshore though and some maybe interesting to you.

Did you know the start ups you mentioned as in the alternatives some I know actually started due to the 0% corporation tax and were probably attracted here directly because of it? Its very difficult financially for a start up or small niche market company to survive without the 0% rate. That is why in the UK you see nearly 70% of start ups fail in the first 5 years of business even with a well thought out business plan. The initial profits invariably go on tax rather than reinvestment into the company. So apart from being an issue I can see the 0% rate as a market attraction for start ups such as the Biotech, medical equipment, optics and clean tech. So increasing the 0% rate of corporation tax would probably be detrimental to the areas you are wanting to expand. Yes it is a very double edged sword and people will always find a way of using it in a way it isn’t meant, but I think that’s a different question entirely than just a flat increase in the rate. Do you think that other jurisdictions also have a responsibility to close the loop holes of their own legislation rather than pointing the finger at the Island to alter theirs? Maybe that would be the way forward and work out both ways?

Not sure about all the Investment funds which have collapsed here but the few I looked at like the recent issue with Louis Group would have been easily solved with a quick Google even prior to the collapse. The issue is that people see the markets and see all the profits and never hear about all the failures. Dealing with the financial markets is a gamble no matter where you are in the world and a bit like a gambler coming out of the casino you never hear about the losses only about the wins and that’s the way London like it. The collapse of high risk high return investment funds is nothing new. It happened in the 90’s with the collapse of the .com market. It is a global issue and NOT an island one. My issue with this is the advice and the people willing to accept it. You never heard about it when they were making money and everything looked great on the returns but as soon as it lost then oh dear… bad advice and a bad call investing will always result in a bad result and unfortunately it isn’t normally the investor who gets their cash back. The old adage never put all your eggs in one basket immediately springs to mind and is probably the best investment advice you will ever hear, and a granny will not charge you £250 an hour for it either.

As for the ticketing scams well I blame the venues for allocating these tickets in the first place. If you stop it at source then there wouldn’t be a market. AM not sure if it is illegal in the UK as I know that some football ticket places are UK based so not sure if that point is actually right.

As for it about an ‘honest’ way of making a living I m not sure what you mean. I have taken the time to read the paradise papers and see no wrong doing whatsoever. I can’t find it anywhere it is illegal in either UK tax law or even the IOM tax law where any of the people have done anything wrong so nothing ‘dishonest’. I even took a look at the alleged issue of a Government law introduced at the request of a company and all I could find was a request asking how the company fits into the legislation and if there is another section of company that was missed from the legislation. Something I believe happens quite often in the UK and other tax jurisdictions.

As for finance disappearing I think it it will just evolve. Its a different ‘animal’ to the 70’s and even the 80’s where the finance markets took off in ways we couldn’t imagine with the general public becoming share holders with the likes of British Gas and BT being the fore runners. Even now we see the move away from private portfolio management to Assurance and Insurance businesses here as it evolves. As for it being immoral well i kind of look it from both sides. If I was working my hardest for my family and run a company that supports so many other families I think I would be looking for a tax efficiency saving. If personal income is charged at 45% for higher rate I would think hang on… I am generating hit 20% for corporation tax as well as the 45% personal tax I would start to think this is getting very unfair. So how would you make it fair across the board?

So the real question is what do you want to achieve if the impossible isn’t possible? A global solution at once is never going to happen and how would you lead by example? Would you take the UK tax system on board in which case we would be massively over taxed for such a small ‘region’. We would see a massive exodus of people back to the UK as they wouldn’t have a reason to stay here. The Island would die under what you would want to see. The reason for the ‘green’ companies being based here isn’t because they want to its because of the incentives that are supplied by the Government via taxation. The zero corporation tax is a massive incentive for ‘junior’ start ups and that would go. If the impact would be to loose the finance sector apart from a few high street names that would stay and even then they would be reduced. The people of this island would leave to go to where the resources are and cheaper cost of living as here would be a massive hike in that cost against personal income. The property market would collapse as people left and the Island would be hit with worst recession in years. The Government wouldn’t be able to support the incentives and taxation would have to massively increase for the Government to survive. So that alone would then see a common level playing field fail. Basically in a level paying field we wouldn’t survive. We have no reason for alternatives to be here. We don’t have the tourist industry 12 months of the year we used to have and couldn’t subsidise enough to make it a viable option for many who want to come here.

It is a difficult thing to try to achieve and to be honest the more I looked at it the feasibility seemed to disappear into a nightmare of joined up jurisdictions. Even the EU doesn’t have a common taxation goal.

But anyway good luck but think that maybe its a bit like a pint of milk that’s gone off. On the outside its a pint of milk. but if you try to look at it closely its a stinker and full of lumps that won’t disappear.

I’m certain the 0% rate offers a powerful incentive for many companies here, but think we need to look at the wider picture and the harm caused by that zero rate. Every onshore economy (ie excluding havens) in Europe taxes company profits at a minimum of 10%. Ireland’s 12.5% rate is often attacked for being too low. It is commonly agreed that, out of the surplus generated by a company’s activities, a proportion should be taxed by the state for social purposes, rather than the full surplus returned to the owners of capital (shareholders). Historically, until 2006 I think, the IoM taxed its domestic companies at 20%, and this wasn’t seen as draconian or controversial.

On the other side of the scale, as I mentioned above, we can list the harmful effects of a zero rate:
(1) allows well-off local individuals to escape tax (legally) by incorporating themselves
(2) denies IoM Govt much-needed tax revenues
(3) risks damaging the island’s reputation, as 0% becomes less internationally acceptable.

An example of (3) is the EU’s decision of December 2017 to place the island on its so-called grey list, complaining that our 0% rate attracts profits earned elsewhere which legitimately should be taxed there.

I would challenge your view that the Paradise Papers showed nothing wrong. The actors from Mrs Brown’s Boys avoided UK tax by having their pay routed through Mauritius. Scores of firms on the IoM offer a simialr service. Legal? Certainly. Moral? Then there’s the case of Mr Hamilton’s jet, given a full zero-rating by IoM Customs and Excise, even though this should (legally) only apply to the business proportion of its use. HM Treasury are now looking into this, so let’s wait to see what they think.